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Caterpillar Investors: Get Ready for Another Ugly Quarter

The heavy-equipment maker is going to see more big drops in sales and earnings.

Caterpillar (NYSE:CAT) is a giant in the industrial sector, with the company having been a component of the Dow Jones Industrials (DJINDICES:^DJI) for almost a quarter-century. Yet as an industrial company, Caterpillar is particularly sensitive to the ups and downs of the global economy, and tough conditions in the key customer groups it serves have sent the heavy-equipment maker's stock into a downward dive over the past year. As investors get ready for Caterpillar's third-quarter earnings report on Thursday, most expect another set of ugly financials from the company, including big drops in sales and earnings. Let's take a closer look at Caterpillar and what it's likely to say in its quarterly report later this week.

Stats on Caterpillar

Analyst EPS Estimate

$0.78

Change From Year-Ago EPS

(55%)

Revenue Estimate

$11.25 billion

Change From Year-Ago Revenue

(17%)

Earnings Beats in Past 4 Quarters

2

Data source: Yahoo! Finance.

When will Caterpillar's earnings stop falling? Investors have grown even more downbeat about the prospects for Caterpillar earnings in recent months, cutting their third-quarter estimates by nearly a quarter and cutting almost $1 per share from their full-year 2016 projections. The stock has also continued to deteriorate, with declines of 17% since mid-July.

Caterpillar's second-quarter results got the company off to a poor start, with ongoing signs that showed no end in sight to the heavy-equipment maker's struggles. Revenue fell a worse-than-expected 13%, and net income fell almost 30% as Caterpillar fought against tough conditions throughout every geographical area and in all of its major business segments.

Caterpillar's woes have stemmed from a sequence of setbacks for its primary customer base. Declining infrastructure and construction spending in emerging-market nations started the slide, and poor performance in the commodities market then added the mining industry to the list of negative factors affecting Caterpillar's results. In the past year, the plunge in crude oil prices has added the energy sector to the list of industries cutting back on capital spending, and Caterpillar hasn't yet been able to navigate through the confluence of downward business cycles to find a clear path to a recovery.

Moreover, bad news from across the industry shows that the problems don't just lie with Caterpillar itself. Last week, industrial conglomerate Manitowoc (NYSE:MTW) slashed its profit expectations for the quarter and now expects its quarterly earnings to fall by more than 90% year over year. Manitowoc blamed its crane-building segment for the reduction in its guidance, pointing to poor conditions in Asia and the Middle East in saying that it now expects crane-related revenue to fall 15% to 20% this year compared to 2014. Given that the same customers who buy Manitowoc's cranes often are in the market for the other types of heavy equipment that Caterpillar provides, the news suggested that Caterpillar could see further declines this quarter as well.

Still, Caterpillar isn't giving up on its efforts to bounce back. Aggressive restructuring efforts announced earlier this month will include cutting 4,000 to 5,000 jobs as well as streamlining operations to find cost savings throughout the company. With a goal of cutting $1.5 billion in annual expenses, Caterpillar hopes that it can improve its margins even as overall revenue continues to fall. Only in that way can Caterpillar slow the troubling declines that it has seen on its bottom line and reassure investors that it can respond effectively to cyclical downturns.

In Caterpillar's earnings report, investors need to keep a close eye on the implementation of this restructuring plan to see how quickly it can start to contribute to its financial results. Most investors expect Caterpillar's sales and earnings to fall again in 2016, so the hurdle for Caterpillar's results to overcome will be relatively low. Nevertheless, after seeing shares fall by more than a third, hard-hit shareholders will want evidence that Caterpillar can become great again. Given how many government around the world are working as hard as they can to bolster their own economies, though, it's far from a foregone conclusion that Caterpillar will be able to accelerate its recovery and get the stock moving back in the right direction in the near future.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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